The Reasons Firms Are ‘Reshoring’ Jobs Go Beyond Trump’s ‘America First’ Doctrine
President Trump built his early agenda on pressuring corporate chiefs to stop offshoring jobs outside the U.S. But experts say rising wages in traditional offshoring hotspots and other risks make the economics of ‘reshoring’ workers back home more attractive.
In March 2017, telecommunications giant AT&T Inc. agreed to add about 3,000 jobs to its American call center workforce. Rather than continue with its pattern of offshoring those jobs to Mexico and slimming its workforce at home, AT&T is beginning to bring those jobs back.
It isn’t alone. Verizon Communications Inc., an AT&T competitor, recently ended its contract in the Philippines with roughly 1,500 workers, while the company is adding about 1,000 jobs to the U.S. workforce.
The practice of offshoring gained popularity in the late 1980s and 1990s, as low wages and exchange rates meant companies could save money on labor costs by shipping jobs overseas, according to John Marthinsen, professor of economics and international business, who is also distinguished chair in Swiss economics at Babson College.
However, the trend is losing momentum — and it’s not just because President Donald Trump is pressuring CEOs to halt the practice in light of his “America First” agenda.
“Economics would tell you that if demand for these types of services goes up, wages are going to go up,” Marthinsen said. Wage growth in countries like China and India — popular offshoring markets — has narrowed the gap in the benefits of offshoring, Marthinsen said.
Other reasons firms are bringing previously outsourced jobs back to the U.S. have to do with customer satisfaction and bottom-line results.
When demand for a product or service picks up, it is important to have talent close to the clients to quickly adjust to consumer tastes, Marthinsen said. Having a dispersed workforce also makes it tricky to manage from overseas. Shipping costs have also increased, cutting into profits.
“Just the act of offshoring makes things more complicated,” Marthinsen said.
Video: Associate Editor Lauren Dixon explains the economics of today’s current ‘reshoring’ trend.
External risks are also a factor in the decision to bring jobs home. When there’s upheaval in a country a company offshores to, such as the Philippines, Ukraine or Turkey, there are risks that impact the success of offshoring.
“When you’re making a decision like this [to offshore], you’re not making it for the next few months; you’re making it for years,” Marthinsen said.
Cybersecurity is another issue pushing business leaders to bring more jobs home, according to Jim Larkin, director of pursuit strategy and innovation at Randstad Technologies, a technology talent and services provider in Atlanta. Compliance laws internationally are less stringent than in the U.S., he said, making data breaches more common overseas.
“The reality is that offshore does present higher risk of cybersecurity,” Larkin said. Risk Based Security’s annual “Data Breach” report found that 68.2 percent of breached records in 2016 came from the U.S., with nearly 10 times as many breaches as the U.K.
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Turnover with overseas talent also cuts into the cost savings of offshoring, said Fumiko Kondo, managing director at Intellilink, a global consulting firm based in New York City. Many U.S.-based companies will ask that their offshored employees work U.S. hours.
“Your top talent typically don’t like working night shifts,” thus resulting in high turnover, she said.
Despite these challenges, offshoring likely won’t entirely disappear, experts say. Some business leaders might feel there is still a cost savings by offshoring jobs. Furthermore, many firms have already invested a lot of time and money in the practice, Kondo said, and reshoring isn’t necessarily easy.
Results of Reshoring
Although companies are reducing their offshoring tendencies overseas, they’re continuing to outsource certain jobs domestically.
“There is a trend toward domestic rural outsourcing,” said Harry Moser, founder and president of Reshoring Initiative, a Kildeer, Illinois-based not-for-profit focusing on reshoring of manufacturing.
Thanks to the lower cost of living in rural America, labor in those parts is far less expensive than in more populous urban centers or technology hubs like Silicon Valley.
While reshoring may lead to job growth in the U.S., it’s not a one-for-one trade. Because productivity improves over time through technology and automation, there are fewer overall jobs coming back to the U.S. than were initially sent overseas, Moser said.
The economic effects of U.S.-based job gains aren’t limited to just the job that comes back. The extra economic boost typically comes in the form of consumer spending, as more U.S.-based workers means more spending on discretionary items.
Reshoring is a complex process, according to Randstad Technologies’ Larkin. It requires planning, communication and expertise. It’s also important to those overseas losing their jobs, Larkin said.
Some firms, for instance, may exert caution in which jobs they opt to bring back and the pace at which they do so. When reshoring IT jobs, in particular, there might be challenges in filling those roles because skills shortages in the technology sector have companies in a bind.
“There isn’t enough in the U.S. to absorb all of that work coming back straight away,” said Peter Bendor-Samuel, founder and CEO of Everest Group, a boutique research and management consulting company based in Dallas.
Still, for some firms, President Trump’s “America First” mantra and tendency to attack adversaries on Twitter have left them feeling added pressure to keep jobs in the U.S. whenever they can, Babson College’s Marthinsen said.
“They don’t want to be tweeted and accused of taking jobs abroad,” he said.
Lauren Dixon is an associate editor at Talent Economy. To comment, email firstname.lastname@example.org.